"Annutizing" an annuity

Thanks R.C. for jumping in here, was hoping you would add to the discussion. I usually keep up with this forum, but missed Steves posting. His situation seems to be similar to mine. My Insurance Co calls my annuity option GRIB rather than GRIP. Guaranteed Retirement Income Benefit. The GRIB was included from the "getgo" and had the cash value equaled the GRIB it would have been a straight cash out no annuity involved. Something else they offered is called "Commutable Annuitization Option" basically a buyout of the annuity anytime after the 1st year of payouts. No way am I going to try and figure that out as an option, I suppose if death was expected shortly, that option may be considered??. I like your example that you had for Steve, split transaction, but have no idea on how to figure the multiple to be used in computing the expected return from Table V.?? My Financial Adv whom I bought this through, is also a broker and CPA, claims he has more degrees than a thermometer. We have talked about this very little so far because the main discussion was options for these accounts. I often kid him that my Quicken account and the reports generated give me much better visibility than his company reports. :-)

Hi, Meebers.

As I told Steve, the big problem is adjusting our mindset because we are just not used to thinking in annuity concepts and terminology.

Insurance companies hire actuaries, who are basically mathematicians specializing in the arcane world of contingencies and probabilities, rather than hard known facts. The "expected multiple" of an annuity is a simple enough idea - how many payments do you think you will collect. But since annuities are usually based, at least partly, on life expectancy, the actuary must use tables showing how many 50-year-old white males in a population of 1 million will die within one year, how many in 2 years, 3 years, etc., until they are all gone. How many of those will be alive and be 55-year-olds five years from now, after we've weeded out the ones who died at 53, and how many will die within a year after that? And some actuary must create those tables and update them to reflect experience after medical advances and other factors that affect our mortal longevity.

But life expectancy is not the only contingency that must be weighed. Since they are dealing with dollars paid in and paid out, actuaries must also consider present and expected future interest rates. Many annuities also include inflation adjustments. Survivors may be entitled to annuity payments after the death of the annuitant. What are chances that the annuitant and/or the survivor will - or will not - survive the term certain?

For more than you probably ever wanted to know about annuities, see IRS Publication 939, General Rule for Pensions and Annuities (about 80 pages long), which hasn't been updated since 2003:

All that is to show why an annuity can't be recorded like a fixed-dollar bond or mortgage. A $10,000 bond is worth $10,000. When its owner dies, it is worth $10,000 to the heir. But a $100 per month annuity may be worth $10,000 on the day before the annuitant dies and worth nothing the day after. After 100 monthly payments, an annuity originally recorded as a $10,000 asset might have been amortized down to zero - and still continue to pay $100 per month for another 20(?) years. About all we poor accountants can do is record the actuaries' best estimates at the beginning and then adjust when the actual facts eventually become known, probably many years later. And about the best evidence that we have on which to base those estimates is the actuarial tables produced by the insurance companies' actuaries. The most widely-available such tables are in the IRS publication These are not necessarily the most reliable, but they often are used "because they are there".

I'm sure that your CPA/broker/adviser has access to current tables and other information and can make a better judgment that I can as to which method - and which numbers - to use in your case.

As I've often said here, I have very little experience with IRAs, Keoghs and other tax-sheltered retirement plans, and many of the rules I did learn have changed since I learned them. My understanding was and is that assets in your IRA don't belong to you, but to the Trustee of your IRA, and don't become YOUR money until you - as an individual - actually receive it from the Trustee. So the annuity owned by the IRA Trustee does not belong on your books at all. Your Quicken should show nothing until you receive a check and deposit in your individual bank account. Until then, it is just an expectancy that you MAY receive some day. Like the proceeds from a life insurance policy on a relative. Until the death occurs, there is nothing to be recorded in your books. Or like a traditional company pension (remember those?). Would you record the entire expected stream of receipts (discounted or not) on the day you retired? Or record each check as income when you receive it? Like Social Security benefits? I know that many accountants don't agree with this approach and simply record the IRA assets as though the beneficiary owned them directly.

As I said, you should rely on your own CPA, who is surely much more current with all this than I am.

RC

Thanks R.C. for your comments. The "checks" are in the mail, the annuity starts next month, in the mean time, I'll be "reading" p939. I do not have the exact amounts as of yet to record in Q for the non annuity amount. I am sure it will be fun and may take a beer or two to get it straight.